Yesterday’s market action was a big fat nothing burger. There was at least one item of black humour. Today’s Age reports, that, “Debt recovery specialist Collection House was at its best share price levels since 2007 after managing director Tony Aveling produced unaudited profit guidance figures suggesting its after-tax performance will be about 55 per cent better.”
“Mr Aveling said Collection House, which sources most of its business by recovering customer debts for banks and service providers like phone and energy companies, opted to use its money to pay off debt, rather than borrow more to buy the debts of others and try to chase defaulters. He also said shareholders could expect an increase in interim dividend, contributing to Collection House shares rising beyond 90¢, before settling to a 12¢ gain at 84¢.”
How about that? A debt collection company growing earnings, paying off its debt, and paying a dividend? What does that tell you about the world when the debt collection business is booming?
To be fair, earnings were up at a few companies like Flight Centre and Computershare. But the banks sold off and the market closed down about 1%. So which is it? Are Australian earnings going to be stronger than expected? Or are stocks already priced for earnings perfection?
We’ll ponder that on the tram on the way into the CBD today. A group of investors touring Australia is in town and we’re on our way to speak to them about our forecasts and strategies for 2010. Mostly this involves more cash, fewer shares targeted to industries where there is scarcity, and a handful of energy, precious metals, and small cap shares.
That may seem like a bit of contradiction: bearish on the stock market but bullish on the riskiest sectors of it. But we’d make that case that it’s owning the banks and other so-called blue chips that’s the bigger risk – given the rewards on offer. It’s better to have at least some shares where when one good thing happens, the share can go up 3-1, 5-1, or 10-1.
But true to form, 2010 is going to be the year the solvency of the welfare state dominates the front pages. People are slowly beginning to understand that huge social welfare states have to be paid for by someone. And if your economy isn’t growing, it’s hard to “spread the wealth around.” You have to “borrow it around.” And that puts you in debt.
For example, Greece has a fiscal deficit that’s nearly 12%, or four times what the suits at the European Union in Brussels say you’re allowed to have and still be a member in good standing. What’s worse for Greece, its total debt-to-GDP ratio is working way to 120% – which is pretty bad, even by American and British standards (although modest by Japanese standards).
It may be satisfying for the EU’s finance chiefs to scold Greece. But they all live in the same very large monetary glass house. This is the proverbial Achilles heel of Europe’s monetary union. Twelve economies, one interest rate, zero flexibility. It’s hard to imagine a better recipe for a fiscal crisis.
Our old friend Marc Faber says to beware the PIIGS – Portugal, Ireland, Italy, Greece, and Spain. These are the Euro nations that borrowed up in the boom and now have to pay it back. If these nations ran their own monetary policy, they could set interest rates low or print money. That would inflate away some of the accumulated debts.
But Europe’s central bankers are not as willing as their Fed counterparts to throw their currency to the dogs. Thus the PIIGS don’t have the any monetary or fiscal stability left. They must live within their means, cut spending, or get some kind of bail out from their neighbours.
The whole situation makes you realise how much of modern “wealth” is just debt dressed up in fancy clothes with a flashy car. And that’s just at the household level. We think some European nation’s will realise this year that you can’t infinitely redistribute wealth to achieve the goals of social justice and equality…if the economy itself isn’t producing that wealth in the first place.
Faber reckons one of the PIIGs will default in the next few years. Whether this provokes a currency crisis in Europe is the open question. What the euro has going for it right now is that it is not the U.S. dollar nor is it the yen. That’s not saying much.
Australia doesn’t yet face the kind of fiscal reckoning that the PIIGs, the U.S., Britain, and Japan face. We meant to show today how that could change quickly in the future. It’s a new scheme to put ultimate responsibility for bank solvency on the Aussie tax payer. But we have a tram to catch, so the story will have to wait until tomorrow. Until then!
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